Chengdu Xinzhu Road&Bridge Machinery Co.,LTD (SZSE:002480) Screens Well But There Might Be A Catch

With a price-to-sales (or "P/S") ratio of 1.5x Chengdu Xinzhu Road&Bridge Machinery Co.,LTD (SZSE:002480) may be sending very bullish signals at the moment, given that almost half of all the Machinery companies in China have P/S ratios greater than 3.6x and even P/S higher than 7x are not unusual. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Chengdu Xinzhu Road&Bridge MachineryLTD

How Chengdu Xinzhu Road&Bridge MachineryLTD Has Been Performing

Chengdu Xinzhu Road&Bridge MachineryLTD certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. Perhaps the market is expecting future revenue performance to dwindle, which has kept the P/S suppressed. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Chengdu Xinzhu Road&Bridge MachineryLTD will help you shine a light on its historical performance.

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, Chengdu Xinzhu Road&Bridge MachineryLTD would need to produce anemic growth that's substantially trailing the industry.

Taking a look back first, we see that the company grew revenue by an impressive 63% last year. The strong recent performance means it was also able to grow revenue by 87% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

It's interesting to note that the rest of the industry is similarly expected to grow by 23% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

With this information, we find it odd that Chengdu Xinzhu Road&Bridge MachineryLTD is trading at a P/S lower than the industry. Apparently some shareholders are more bearish than recent times would indicate and have been accepting lower selling prices.

What Does Chengdu Xinzhu Road&Bridge MachineryLTD's P/S Mean For Investors?

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Chengdu Xinzhu Road&Bridge MachineryLTD revealed its three-year revenue trends looking similar to current industry expectations hasn't given the P/S the boost we expected, given that it's lower than the wider industry P/S, There could be some unobserved threats to revenue preventing the P/S ratio from matching the company's performance. It appears some are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions should normally provide more support to the share price.

Having said that, be aware Chengdu Xinzhu Road&Bridge MachineryLTD is showing 1 warning sign in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Chengdu Xinzhu Road&Bridge MachineryLTD, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.